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Self-test Questions
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1

The Common Agricultural Policy (CAP) accounts for only a minor fraction of the EU’s budget.
A)TRUE
B)FALSE
2

The CAP started in the 1960s as a simple price support programme.
A)TRUE
B)FALSE
3

The EU was a net importer of food when the CAP started.
A)TRUE
B)FALSE
4

The simple economic analysis of the early CAP is quite similar to the analysis of an MFN tariff.
A)TRUE
B)FALSE
5

Since the CAP typically keeps the price of food in the EU above world market levels, it can be thought of as a having the same effects as a tax on consumption and a subsidy to production.
A)TRUE
B)FALSE
6

The main effects of a price support programme like the CAP are:
A)a rise in the quality of food produced.
B)an improvement in the environmental friendliness of farming methods.
C)an increase in farm incomes with most of the increase going to the largest, most productive farms.
D)an increase in food imports.
7

The CAP’s budget share is:
A)about 50% now, but in the 1970s it was much less.
B)about 50% now, but in the 1970s it was much more.
C)about 25% now, the same as it has always been.
D)It fluctuates a great deal from year to year.
8

The distribution of farm sizes in the EU:
A)is very equal, most farms are fairly large.
B)is very unequal: ranking farms from large to small, the 7% largest farms account for about half the land, while the 50% smallest farms account for only 7% of that land.
C)is not an important consideration.
D)has been getting more even over time.
9

Between the 1970s and the 1990s:
A)the EU became more dependent on imported food.
B)the EU reduced its dependence on imported food but remained a net food importer.
C)the EU switched from being a food importer to a food exporter.
D)the cost of the CAP rose, but it fell as a proportion of the EU’s GDP.
Suppose the EU is a food importer and the CAP keeps food prices in the EU at the ‘Price Floor’ shown in the diagram using an import tariff while world food prices are <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077103947/117919/ch08q10eq02.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> as shown. Use the diagram to answer the questions; in particular refer to the labels in the diagram <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077103947/117919/ch08q10eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (24.0K)</a>

10

The exact same outcome in terms of output, imports, consumption, prices, government revenue and welfare could be achieved by imposing a sales tax equal to and a production subsidy equal to .
11

If the EU abandoned the price floor policy and allowed free trade in food (again assume no change in the world price), the domestic price would be <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077103947/117919/ch08q10eq02.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> consumption would be , production would be and imports would be ; this liberalisation would change producer surplus by , consumer surplus by and government revenue by . On the whole, the net gain would be .
Assume for simplicity that the world food price remains unaltered by changes in EU policies (i.e. it stays at <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077103947/117919/ch08q10eq02.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> regardless). Consider a situation in which the EU’s food supply curve is initially given by the curve marked Supply, but due to technological progress and investment encouraged by high and guaranteed prices, the supply curve shifts out to the curve marked Supply'. In answering the questions refer to the labels in the diagram. <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::::/sites/dl/free/0077103947/117919/ch08q12eq01.GIF','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (25.0K)</a>

12

Prior to the supply curve shift, the EU could enforce the price floor with a tariff equal to , while afterwards it can only enforce the price floor by buying a quantity of food equal to ; thus prior to the shift, enforcing the price floor made a contribution to the EU budget equal to while after the shift, the price floor cost the EU budget , assuming that the food the EU buys is not resold.
13

Prior to the supply shift, the net welfare cost of the price floor was .
14

After the supply shift, the welfare impact of the price floor compared to free trade is for EU consumers, for EU producers, and for EU taxpayers.
15

If the EU sells the food it buys post-supply shift on the world market, the world price will and this will foreign food producers.





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